India slashes windfall tax on diesel and crude oil to boost consumption

The Central government announced a reduction in the windfall tax on crude oil and diesel. The tax on domestically produced crude oil, in the form of Special Additional Excise Duty (SAED), was lowered from Rs 9,800 per tonne to Rs 6,300 per tonne. Additionally, the SAED on diesel exports was decreased from Rs 2 per litre to Rs 1.

Let’s first understand what windfall tax is and how it affects crude oil prices.

A windfall tax is a one-time tax imposed on certain industries when they experience unexpected and above-average profits. The term “windfall” refers to a sudden and unanticipated increase in profits. The tax is typically levied on industries that benefit from favourable economic conditions or government policies that lead to increased profits.

In the context of crude oil, a windfall tax is a tax imposed on oil and gas companies when oil prices rise significantly, leading to substantial profits for these companies. The tax is designed to capture a portion of these excess profits and redistribute them to the government or taxpayers.

The rationale for imposing a windfall tax on crude oil is that the profits generated by oil and gas companies during periods of high oil prices are not a result of their own business decisions or investments, but rather due to external factors such as geopolitical events or supply disruptions. These companies have not made any additional investments or taken on additional risks to achieve these profits.

This adjustment comes after the tax on crude oil was raised to Rs 9,800 per tonne from Rs 9,050 a tonne on November 1. The tax rates, implemented as windfall profit taxes since July 1 last year, are subject to review every fortnight based on average oil prices in the preceding two weeks.

The windfall tax is triggered for domestic crude oil when global benchmark rates surpass USD 75 per barrel. Similarly, the export of diesel, aviation turbine fuel (ATF), and petrol face the levy if product margins rise above USD 20 per barrel. This move reflects the government’s response to fluctuating global oil prices and aims to balance tax rates accordingly.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.